INSIGHT: Coronavirus and producer price war bring the oil market to its knees

LONDON (ICIS)–Monday’s crash dragged oil prices to a 18-year low, surpassing 2014’s much-dreaded levels. Futures bowed completely to this unprecedented combination of severely depressed global oil demand and a producer price war fuelling supply.

ICE Brent traded at a daily low of $ 21.76/bbl on 30 March, almost a third of levels seen at the start of January.

As countries roll out economic relief packages in support of the coronavirus outbreak, the world fears another recession.

The US stands as the next in line to be the epicentre of the coronavirus pandemic. A 90% drop in the movement of people is welcomed to limit the spread of the virus but means that fuel demand is next to take a tumble after jet fuel demand hit a multi-year low.

As far as crude is concerned, conversations will switch from ‘how low’ to ‘when will it bottom out’.

Oil traders will be busier than usual with a steep contango in the market and land storage capacity filling up quickly.

Floating storage will be one to watch in upcoming sessions.

Even a reconciliation between OPEC+ will not bring prices back.

Editorial warnings that some industry participants called media sensationalism are quickly becoming a reality. And a 1 April end to this crisis now is just wishful thinking. Some comfort stems from a realistic demand recovery on the cards for June.

Responses from heads of government to the coronavirus outbreak have been volatile, ranging from some carelessly downplaying the virus to full-scale lockdowns to protect local health services. As a consequence, the oil market is in a much a different situation from that at the start of March.

At the time, hopes lingered for OPEC+ to curb production and bring balance to the limited demand from China. The cornonavirus outbreak in Italy was only a start. Some in the market dismissed bearish expectations as exaggerations. However as the OPEC+ alliance crumbled and Saudi Arabia slashed its official selling prices, oil went into a nose-drive.

Never before had the market been dragged from both a supply and a demand perspective. Saudi Arabia’s threat to boost output was ultimately harming it as much as everything else.

US shale oil producers shivered at the thought but, as weeks passed and the pandemic hit Europe, hopes turned into fears that oil prices might slide below $35.00/bbl.

The Brent basket started trading last week at around $26.22/bbl at 12:30 London time on Monday but by Friday settled at $24.93/bbl.

The crash today shows just how weak market fundamentals really are.

(Clarification: recasts extent of price low in opening paragraph)

Insight by Sophie Udubasceanu